How Homeownership Has Changed in America And Why You Shouldn't Give Up on Buying
In one short decade, home ownership has gone from being the Holy Grail of middle-class financial achievement -- the biggest and most lucrative investment most of us would ever make, and the one most reliably likely to pay off -- to a very risky financial ball-and-chain that more and more of us are going way out of our way to avoid.
To be sure, rental housing is no joy. You're answerable to the landlord for every picture nail, plugged drain and loose window; and you get to endure bad landscaping, cheap appliances and paint and carpet colors not even Martha Stewart could work with. But if the trade-off is between spending your life co-existing with your landlord's surreal aesthetic choices or watching your life savings turn into six-figure debt as the value of your house sinks beneath the waves, more and more of us are choosing to suck it up and embrace the charms of bubblegum pink bathroom tile.
For the last few years, renting has seemed prudent and safe -- even for those lucky enough to have the cash for a down payment and a stable enough income to buy. But as the bubble has deflated, and the prices are getting closer to what they would have been in a less exuberant economy, a few hardy souls are starting to venture back in.
What's different now, though, is that there are signs that the deep expectations and motivations of American homebuyers are changing. The economic crash has created some deep ontological shifts in how we value homes and home ownership. The early signals are starting to suggest that we're on a return trip back to a much older American tradition of home ownership – one that assessed a home's primary value not on the basis of its price on the open market, but for what it offered intrinsically to families in terms of security, stability and self-sufficiency.
Recent years have seen a boom in slow food and slow money. Now, some of us are also starting to think about the virtue of slow home ownership as well.
Back to the future
For the first 150 years of our history, we were mostly a farming nation; and this fact deeply colored the way we defined words like "home," "security," "prosperity" and "freedom."
Up until around 1900, farmland was plentiful and cheap enough that it wasn't uncommon for an enterprising white guy to have 40 acres in his name by his late 20s -- either by working hard for somebody else and saving up his cash, or by toughing out the hard five years it took to prove up a homestead. But acquiring the raw land was just the start: that up-front investment would be followed by many decades of exhausting work to build up the infrastructure (barns, herds, flocks, houses, equipment) that yielded a reliably prosperous and stable farm, providing employment for a large family and food for scores of fellow citizens.
Owning a farm (or perhaps more accurately, allowing it to own you) was an all-in commitment that you hoped to make just once, and planned to stick with for the rest of your life. Ideally, your kids would take it over and improve it even further -- so any investment in your homestead was an investment in a better, easier future for them, too. And in return, the house and land rewarded you with a reliable source of money and food, a secure place for your family, and a sturdy roof that nobody could take away from you. The fact that you owned your own place is what made you a free man.
As Americans moved into the cities and suburbs starting around the turn of the last century, we left the plows, cows and barns behind -- but this deep idea about the intrinsic, enduring value of a piece of turf we could call our own came right along with us. A house is the freedom to do what you want. It's guaranteed shelter and comfort, no matter what the world dishes out. It's a castle you can spend years turning into the private paradise of your dreams. It's the emotional and physical center of gravity for generations of family. It's the matrix of neighborhood connections that builds up over decades, as you look out for each other's houses and watch each other's kids grow. It's capital you can borrow against to fund other investments, like a business of your own or an education for your kid. It's something you pay off in 30 years, so you'll have a free, comfortable, familiar place to live when you retire. If you're really lucky, you'll be blessed to die there, surrounded by your family.
For people who came up in less certain times -- like the panics of the late 1800s, or the Great Depression -- having a home you could count on, come hell or high water, represented a kind of security that was far more valuable than mere money. So people continued to make long-term commitments to their houses. People in the military or who worked for large corporations might be moved around every few years, and sometimes people traded up if their incomes took a real leap. But if you were an average middle-class guy who owned a small business, had a government job, or worked out at the plant, then you could expect that you'd start and end your career right where you were. There was no reason your first house couldn't also be your last.
This is how it happened that so many people in our parents' and grandparents' generations bought a little mid-century modest place in their 20s, and ended up staying there for the rest of their lives. The houses were small -- the average new house size in 1950 was 953 square feet, increasing only to 1,200 by 1960 -- but they were affordable enough that a single paycheck could cover the mortgage with some to spare. (My stepmother still lives in the 1,100-square-foot house my dad bought in 1967.) And the house returned your commitment: its real value was in the quality of the lifetime you got to spend in it, and all the little things you'd done to make it your own. Historically, most generations of Americans have expected to get back out of their houses no more and no less than exactly what they put into them. And even at that, they thought it was still a deal very much worth making.
Financialized markets = expensive houses
The drift away from this view of a home as having an intrinsic value of its own was slow at first. People became more mobile in the decades following World War II, moving to the coasts and the Sunbelt (now made habitable by air conditioning) over the new interstates, and taking jobs with ever-bigger companies that stationed them in offices all over the country. But the shift really gathered force in the late '70s and early '80s, as several developments conspired to pull the rest of those deeply planted American homeowners up by the roots.
Economist Dean Baker of the Center for Economic and Policy Research ticks off several factors that fed the change. "People had a much more 'buy and hold' attitude towards housing in the '50s, '60s, and into the '70s," he told AlterNet. "A lot of things worked to change that. It was much easier when you had a reasonable expectation that you could hold the same job until retirement. Also, when divorce was rarer, it was easier to commit yourself to being in the same house for long periods of time. And there was, on average, no appreciation in excess of inflation (though certain markets had high rates of appreciation), so people in general could not count on making money by flipping homes."
Changes in financing rules also fed an accelerating market. "Refinancing was unusual and generally expensive in the '70s," Baker continued. "In fact, many mortgages had large penalties for pre-payment. This was outlawed in the late '70s or early '80s, so it became much easier to refinance mortgages" -- which, in turn, encouraged people to view their houses less as cherished family homesteads and more as fat and growing piggy banks.
In addition, as the Boomers entered the housing market en masse in the late 1970s, houses started to appreciate faster than the rate of inflation, which launched the flipping mania that flourished right up until the 2008 crash. And alongside all of this, the Reagan-era assaults on both unions and public-sector jobs undermined the long-term employment stability of millions of Americans, further eroding people's willingness to become too attached to their homes.
(A side note: the intergenerational dislocations caused by this attitude shift were also the spark that launched the conservative tax revolt, which began with California's nefarious Proposition 13 in 1977. As the market heated up, the tax assessments on retirees' homes started rising so fast that their fixed incomes no longer covered their property taxes. They fought back by lining up behind conservative tax warrior Howard Jarvis, who sold Prop 13 with the argument that it would let seniors stay in the homes they'd loved and invested in their entire lives -- and which the Big Evil Government was now trying to take away.)
The upshot was that by the mid-'80s, the old expectation that a middle-class life would be defined by one job and one house had almost completely given way to a new, harder-edged view. A house wasn't anything to get emotional or romantic about, let alone to commit your life to. Beyond a certain point, you didn't make the place pretty or comfortable for yourself; rather, you focused on the improvements (an updated kitchen, a new deck) that would increase your profit at the next sale. It was just a financial instrument you bought, hung onto for a while while it appreciated, and then sold at a hefty profit so you could move on to something better.
And above all, we learned the lesson: do not fall in love or get all sentimental about it, because it will only hurt that much more on that inevitable not-too-far-off day that you change jobs, end this relationship, or find a better deal and decide to move away.
Back home again
Now that the boom has gone bust, a lot of Americans are left wondering if there's any reason at all to buy a house now. Seen from the perspective of the high boom years, home ownership now offers no value proposition at all. If it's not going to double your money in a decade, then what's the point?
And yet, in spite of it all: some of us are still getting out there into the market, and closing deals. You have to ask: what in the hell are they thinking?
Despite the fact that homes are no longer sizzling investments, the bald fact still remains: you need a place to live. And in this deflated market, some people are doing the math and coming to the surprising realization that owning a home in today's market can be cheaper than renting.
Follow me here. First, there's the matter of the down payment. If you've got enough cash on hand for a healthy down, you're probably already painfully aware that there aren't many places to invest that much money these days that will yield any kind of reasonable return. So why not tuck it away into a comfortable place of your own that will, at the very least, make you a little happier every day that you're in it? It may not grow much -- but at least if things go to hell, you'll have a roof over your head, and you can call it your own.
Then, there are the monthly payments. The good news is that mortgage interest rates are at or near historic lows. If you've got good credit and a stable income in addition to that down payment, you can get a 30-year fixed mortgage that may very well cost less per month than it would cost to rent a similar house. And, on top of that, you'd get a mortgage interest deduction, which could well make this a much sweeter deal than renting.
The bad news is that in this new environment, it's probably realistic to give up on the idea that your mortgage money is contributing much to your investment. Rather, it's better to view it as cheap rent on the house -- the month-to-month cost of living there. If you weren't paying it to the bank, you'd be paying it to a landlord. Seen this way, the only real investment you have in the house is that down payment, plus the cost of any improvements you might make. As long as you can recover at least that much when you sell the house, then owning will have been a better deal than renting -- and these days, that's about the best anyone can hope for.
Also: this new logic rewards people who can commit to a place for a long time. The longer you stay, the cheaper your house will become. First: with every passing year, you'll avoid paying out tens of thousands of dollars in rent to someone else. You may not recoup much of it; but at least you'll have a shot at adding something to your equity. Over 10 or 20 years, that can add up to a lot of money. Second, the longer you stay, the more your investments in improvements will be worth to you, personally. A house that's not a financial instrument needs to do much heavier duty as a really satisfying place to spend your days. But if you're going to be there a long time, then investing in a marvelous wood shop or a luxurious bathroom or a glorious back yard will yield years of happy returns. Taking the emphasis off the house's potential market value gives you freedom to plan improvements that will enhance the house's intrinsic value to you, rather than to some imaginary future buyer.
Is this really happening? Yes.
There are early signs from the field that Americans really are seriously rethinking what investing in a house means to them, both financially and emotionally. Dean Baker, for one, is seeing a shift in buyer behavior in the marketplace. "Going forward, having seen so many people burned, I think it is unlikely that we will get anything like the flipping we saw in the bubble years any time soon," he observes. "We may settle into something like what we had in the '50s and '60s, with the qualification that people are now much less secure in their jobs and their marriages, which virtually guarantees that they will be less secure in their homes. I don't think that we will be able to go all the way to the mentality of that era, but we are likely to be much closer to the '50s-'60s sensibilities in the housing market than the '00s."
Rob Graham, the Realtor who recently sold me a new house, says he's also seeing signs of this shift among his buyers. "We've all been raised in a disposable society," Graham says. "And that's been true of housing, too. You used to be able to sell a house at a profit in two years -- but since the recession, that's transitioned to a five-year commitment."
"Real estate is no longer bulletproof," he continues. "You need to look at it as a long-term deal. The folks I'm seeing are looking to be in their starter home for a longer period of time -- from two or three years then to five years now. For their second home, where the Boomers looked at it as a seven-to-10 year investment, the Millennials I talk to see it as the 20-year home where they'll raise their kids. And then they'll buy a third home to retire in -- and that's it. They're not planning to turn their homes every three to five years any more."
Furthermore, says Graham, people are looking for the kind of creature comforts that will make that longer-term commitment more satisfying, including easy proximity to markets, transit, parks, schools, work, and churches. And they want homes that are less demanding to live in. "For decades, the trend was to larger homes. Now, people don't want to clean that much house or mow that much lawn. They want more sustainable, greener, smaller homes instead. I'm having more conversations about how much time and money it will take to maintain a house than I am about its resale value. It's an emotional change: people are putting a lot more thought into what they're purchasing, because they see it as a longer-term investment rather than a financial asset."
The crazy days are over. But better times may be here. Settling into homes that we can love for their own housey goodness changes our relationships to a great many other things as well. If our houses aren't piggy banks, then we have to re-think our expectations about investing and money, and be more careful about building and preserving real wealth over a longer period of time. If we're sticking around longer in the neighborhood, then we'll have more time to get to know our neighbors -- and build the kind of social capital that over the longer term adds both economic and intrinsic value to our homes. This kind of rootedness also makes investment in things like on-site solar and wind generation (which can take a few years to pay for themselves) -- or the years it takes to plant trees and build up a great garden patch -- much more worthwhile.
And there will be rewards to our families -- in long friendships that unfold over years, in a connection to the coming and going of the seasons seen from the same windows year after year, in more soul-deep commitments to a place that will always be remembered as home. If we want more humane and welcoming places to live, we need to start by being willing to commit ourselves to spending the years it takes to create them.